Mettler-Toledo International Inc. (MTD) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to our Third Quarter 2013 Mettler-Toledo International Earnings Conference Call. My name is Jay, and I will be your audio coordinator for today. [Operator Instructions] Thank you. I would now like to turn our presentation over to your hostess just for today's call, Ms. Mary Finnegan. Please proceed, ma'am.

Thanks, Jay, and good evening, everyone. I am Mary Finnegan, I am the treasurer and responsible for investor relations at Mettler-Toledo. I'm happy to have you joining us tonight. I am joined here by Olivier Filliol, our CEO; and Bill Donnelly, our Executive Vice President. Now, for some administrative matters. This call is being webcast and is available for replay on our website at www.mt.com. A copy of the press release and the presentation that we will refer to on today's call is also available on our website. Let me summarize the Safe Harbor language, which is outlined on Page 1 of the presentation. Statements in this presentation which are not historical facts constitute forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see the discussion of our recent Form 8-K. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions: Factors Affecting our Future Operating Results, and in the Business and Management Discussion and Analysis of Financial Condition and Results of Operations sections of our Form 10-K. One other item, on today's call, we may use non-GAAP financial measures. More detailed information with respect to the use of and differences between the non-GAAP financial measures and the most directly comparable GAAP measure is provided in the Form 8-K. I will now turn the call over to Olivier.

Thank you, Mary, and welcome to everyone on the call. I will start with a summary of the quarter and then Bill will provide details on our financial results and guidance. I will then comment on current business conditions, as well as provide an update on new products launched, as well as some additional investments we are making in emerging markets. As always, we will have time for Q&A at the end. The highlight for the quarter are on Page 2 of the presentation. Local currency sales increased 1% in the quarter, with the decline in China worse than expected. However, Europe did a little better and the Americas had a solid quarter in line with expectations. We had another quarter of gross margin improvement which, combined with the benefit of our cost control initiatives, drove a solid increase in operating profit and earnings. I'm pleased with the 8% increase in earnings per share, given the modest sales growth. While economic indicators have pointed to some improvements, we have not yet seen that translate into our markets. We do expect some modest improvements next year and we are initiating selected investments in anticipation of more growth. Bill will provide additional details for the remainder of 2013 and for 2014, and I will now turn it over to him, to first cover third quarter financial results.

Thanks, Olivier, and hello, everybody. Let me start with some additional details on sales, which were $591.7 million in the quarter, an increase of 1% in local currency. On a U.S.-dollar basis, sales increased by 2%, as currencies benefited us by about 1% in the quarter. Excluding the impact of exited product lines in China, local currency sales growth was 2% in the third quarter. I'll have some additional comments on China, including the product line exits, later on the call. One additional comment, in terms of the quarter, order entry was again better than sales with 3% growth, this translated into good backlog growth versus the prior year. Turning to Page 3 of the presentation. We outlined sales by geography. In the quarter, local currency sales increased by 5% in the Americas and 7% in Europe. Asia/Rest of World decreased by 8%. China was the main contributor to the Asian decline, with its sales down by 12% in total and 9% excluding the impact of exited product lines. Without the impact of the exited product line, Asia/Rest of World declined 6% in the quarter. On Slide #4, we showed year-to-date results by geography. For the 9 months, local currency sales increased by 4% in the Americas, by 1% in Europe, and declined by 5% in Asia/Rest of World. On Slide #5, we showed sales by product line for the third quarter. Laboratory Products increased by 3% in local currency, while Industrial declined 3%. Food Retailing increased by 14%. And again, adjusting for Chinese product line exits, the Industrial sales declined by 2% in the quarter. The next slide shows year-to-date sales by product line. Laboratory Products increased 1% while Industrial declined 2%. Food Retailing has increased 3% year-to-date. And now let me turn to Slide #7 of the presentation, which shows our full P&L. Let me walk you through the key items. We're very pleased with our gross margins, which were 53.8% in the quarter, a 50-basis-point increase over the prior year. We benefited from pricing and lower material costs, which were offset, in part, by an unfavorable mix and some currency headwinds. R&D amounted to $29 million, a 2% increase in local currency as compared to the prior year. Growth in R&D is impacted by the timing of new product launches, and we continue to benefit from increased R&D activities in low-cost countries. SG&A amounted to $173.4 million, which is in -- which in constant current -- which is constant with the prior year in local currency. We benefited from our cost control measures and lower variable compensation, which was offset by higher sales and marketing investments. Adjusted operating income amounted to $116.1 million in the quarter, and this represents a 6% increase over the prior year amount of $109.2 million. Our operating margins were 19.6%, an increase of 70 basis points over the prior year. We estimate that currency reduced operating profit growth by 2% in the quarter and reduced operating margins by 60 basis points. We're very pleased with the growth in operating income in the quarter. We were able to overcome the more challenging-than-expected market conditions in China, as well as an adverse currency environment. Behind the scenes, it was also a quarter where we went live on 2 large projects. Our largest U.S. unit went live on Blue Ocean and we started running European logistics through our new hub structure in The Netherlands. Both of these projects are complex and had their own challenges and a fair amount of management attention. Nevertheless, we were able to drive solid operating profit growth in the quarter. A couple of final comments on the P&L. Amortization amounted to $6.7 million in the quarter. This is higher than last year's and last quarter, as it reflects additional amortization associated with adding more users to Blue Ocean with the previously described Go Lives. Interest expense was $5.6 million in the quarter, while our effective tax rate continues to be 24%. Fully diluted shares were $30.6 million, which is a 3% decline from the prior year, reflecting the impact of our share repurchase program. Adjusted earnings per share were $2.60, an 8% increase over the prior year amount of $2.40 per share. On a reported basis, earnings per share was $2.43 per share, as compared to $2.28 in the prior year. Reported earnings per share includes a pretax restructuring charge of $5.5 million or $0.14 per share. This is primarily employee-related charges for cost measures announced last year. Reported EPS also includes $0.03 of purchased intangible amortization. The next slide highlights our year-to-date results. Let me touch briefly on the key items. Local currency sales were flat as compared to the year-earlier period and the first 9 months. Gross margins have increased by 100 basis points, while our operating profit increased by 6%. Year-to-date, adjusted EPS has increased by 10%. We're very pleased with the earnings growth achieved in the first 9 months of this year. Now let me turn to cash flow. We had another strong quarter of cash flow generation. Free cash flow amounted to $107.6 million, a 23% increase over the prior year amount of $87.3 million. On a per-share basis, this represents an increase of 28%. Year-to-date, our cash flow per share is up 26% over the prior year period. For the full year, we expect free cash flow to be in the $270 million to $275 million range and we're pleased with our working capital ratio during the quarter. ITO was at 5.2x this quarter, as compared to 4.6x a year ago and our DSO was about 44 days, about 1 day slower than last year. This is probably a good time to spend a few minutes on our current market conditions as we see them in China, and what we think it means for our business. Market conditions in China during the quarter were weaker than expected. Last time we spoke, overall, we saw a differentiated demand, with certain sectors investing such as environmental, food safety and auto, but many others are not investing. On the Lab side, we had challenging comparisons and continue to feel the impact of credit constraints by certain customers such as dealers. We also saw that many Industrial customers who buy our lab equipment spent less. We would expect the overall dynamics on the Lab side to improve in the coming quarters. Now for the Industrial business in China. We see continued weakness driven by the global -- the government slowdown in infrastructure investment, which is having a direct impact on industries such as steel and cement. We also see a slowdown in investment by many industrial customers, as we see less new plants and plant expansions. As mentioned earlier, we exited certain businesses in China. Specifically, this relates to project businesses done with smaller regional governments as part of their infrastructure development. We have reviewed these businesses and determined that we see insufficient return opportunities. As a result, we restructured some of our activities in China and are directing resources towards more profitable opportunities. This will allow greater focus of our engineering and marketing resources on segments of the market that are driven by consumer consumption such as food, pharma, testing labs, segments which are more resilient to the economy and the future direction of that economy. China's sales by destination were down 9% in the quarter without the impact of these product line exits, which reduced sales by a further 3%. In Q4 and in 2014, these exited product lines will reduce sales growth in China by about 2%. While we expect sales in China to continue to be impacted in 2014 due to these market conditions, we remain bullish about China in the medium term. As their economy moves more towards consumer-driven segments, our Lab and Product Inspection instruments will grow faster and our core Industrial will be reduced as a percentage of total sales. I mentioned this last quarter, but I think it's worth repeating again, we have long believed that the growth in China will not be a smooth line, rather, will face more up and downs than in the developed world. Clearly, we're seeing some of this now. Now let me cover guidance for Q4 and for 2014. We see dynamics differently by region. Our businesses in the Americas are solid and we see improvement in Europe, but this region remains below historic levels. I've already mentioned China, but clearly, the economic framework is more uncertain in this region that in the developed regions. Now for the specifics. For the full year 2013, we believe our sales growth in local currency will be approximately 1%, at the lower end of the 1% to 2% range we provided last quarter. This is largely driven by our current view of short-term growth in China. With this slightly lower revenue estimate, we're narrowing the top end of our 2013 adjusted EPS guidance to a range of $10.45 to $10.50, or a growth rate of 8% to 9%. For the fourth quarter, we'd expect local currency sales growth to be in the range of 2% to 3% and adjusted EPS of $3.70 to $3.75 or a growth of 7% to 8%. Now for 2014, our current expectation is that local currency sales growth will be in the range of 3% to 4% and adjusted earnings per share will be in the range of $10.35 to $10.55. Using the midpoint of our 2013 guidance, this applies -- implies an adjusted EPS growth of 8% to 10%. In terms of how the year plays out, we'll provide more details on quarterly estimates throughout their. However, in general, we expect better growth as the year progresses. Specifically, we expect China to continue to be weak in the first half of next year. Therefore, more EPS growth will come in the later part of the year. I felt it was worth to point this out, as we now have first quarter estimates assuming a 16% EPS growth, which would not be in line with our current thinking. Before I turn it back to Olivier, let me cover some specifics on the guidance, as I know you'll be updating your models. First, currency. We expect currency to have no impact on sales in the fourth quarter and for the full year 2013. In 2014, we also expect currency to be neutral to sales. In terms of its impact on earnings, we would expect currency to reduce earnings by approximately 2% in the fourth quarter. For the full year 2013, currency is reducing earnings, overall, again by 2%. For the full year 2014, we expect currency to reduce earnings growth by approximately 1%, with more of the impact in the first half of the year as compared to the second half. A couple of additional points: we have continued to assume an effective tax rate of 24% for the remainder of 2013 into 2014; and that all free cash flow will be used for share repurchases. As I already mentioned, we expect free cash flow to be in the $270 million to $275 million range this year and about $290 million next year. This represents a 10% increase on a per share basis for free cash flow next year. Just one final item for your models. We have assumed amortization expense in Q4 will be similar to the level that we reported in Q3. Amortization in 2014 will amount to approximately $28 million, an increase of $4 million versus 2013, mostly due to more users on Blue Ocean. Okay. That covers my comments on guidance, and I now want to turn it back to Olivier.

Thanks, Bill. Let me start with summary comments on business conditions. Lab increased 3% in the quarter, with good growth in Europe and the Americas and a decline in Asia/Rest of World. In terms of product area, Balances and Process Analytics had good growth. Turning now to Industrial, which was down 3% in the quarter, with Product Inspection up low single digit and core Industrial down 5%. The decline in core Industrial is driven principally by Asia, particularly China, although we also had a decline in core Industrial in the Americas. In Europe, core Industrial was roughly flat. For Product Inspection, we had great growth in orders, but not everything was shipped because of lead times. Retail was up 14% in the quarter, with growth in all regions, but particularly strong growth in the Americas, due to project activity. Now let me make some additional comments by geography. We were very pleased with the growth in the developed world in the quarter, with Europe up 7% and Americas up 5%. This compares very favorably against our direct competitors and peer companies and supports that we are continuing to gain share. I realized that strength of the developed region was a bit overshadowed by China and the dynamics in China that specifically impacts us, given our overweight to the Industrial sector. As a reminder, we are very focused on Industrial in China, which accounts for 60% of our Chinese sales. And even our Lab business in China has a large component of industrial companies. That covers my comments on current market conditions. While the overall economic framework is not ideal, we continue to see opportunities for growth and share gain. Let me walk you through some of our current focus areas. These are just a couple of the many examples we have. New product launches continued to be an important driver of growth and capturing share. An example from our laboratory offering addresses a common challenge in high-throughput QC labs, due to the accidental mix-up of sample beakers during weighing and filtration. This type of mix-up can cause inaccurate test results, as well as potential liability issues for our customers. In conjunction with the launch of our new high-end balance and our new in-motion automated sample changer, we have evolved an innovative RFID chip tag for titration. Since weighing is often the first step in the titration process, the RFID chip tag will capture all relevant data from the balance when the sample is weighed. Once captured, the information does not have to be reentered into the titrator, thereby eliminating any potential for mistakes. Furthermore, the titration process is more efficient as beakers with different liquids can be loaded quickly onto the automated sample changer without concern about the correct order since the RFID chips have all relevant information to ensure titration is done correctly. The titration RFID technology is just one of the several intelligent features available in our upgraded Excellence Analytical Balance. This launch provides numerous enhancements that improved productivity, accuracy and security of the weighing process in the lab. For example, an easy-to-see green status light indicates the balance is level and tuning calibration and testing are up-to-date. Another feature ensures results are not compromised by electrostatic charges that can occur with normal handling of beakers. These features help take the worry out of weighing, which is especially important to our pharmaceutical and other weight-related customers. The balance is also compatible with our laboratory software, LabX, which provides full traceability. We completed the development and launch of this upgrade in less than 12 months, which is -- which demonstrates our agility in quickly responding to our customer needs. Finally, we are also focused on accelerating the development of new emerging market economies of Indonesia, Vietnam and the Philippines. Recently, I had the opportunity to discuss the progress in these regions during the annual budget tour. After further review, we are committed to adding additional front-end resources in the emerging markets. This will include an increase in our direct field presence in Indonesia and development steps for the Philippines. We have already established a presence in Vietnam and are now working on our growth strategy for the medium term. Additional resources will also be added in Turkey and Eastern Europe. These are tactical investments, as we want to ensure we have the resources to capture share in these regions that have impressive growth potential. That concludes our prepared remarks. In summary, we recognize that conditions remain challenging, particularly in China. We have good market positions in this region and will monitor developments closely. Our cost structure is in good shape and we believe that we are strongly positioned to capture growth opportunities and market share. Now before I turn it to the operator, I want to make a comment on today's organizational announcement that Bill has been promoted to Executive Vice President and that Shawn Vadala will assume the role of Chief Financial Officer, reporting to Bill. The implementation of these roles and related responsibilities has been underway for some time. I'm very pleased to have such a strong and deep finance team at the company. The finance leadership team, Bill, Shawn and Mary, have been together for more than 15 years and have tremendous level of knowledge and experience in their roles. These promotions are an acknowledgment of the broad role Bill placed within the organization, which has made -- been made possible by the increasingly important contributions Shawn has made in the finance organization. We expect to have Bill, Shawn and Mary together for many years to come. Bill, I'm sure you would like to make some additional comments as well.

Sure. Thanks, Olivier. Let me just make a couple points. First of all, I want to say that I'm very happy with my role here at Mettler-Toledo and excited about this development. Not only for myself, but of course, for Shawn. Some of you have met Shawn in the past, he's been our group controller, and he's been at Mettler-Toledo for about 16 years. In addition to Shawn's finance responsibilities, he's been the leader of our pricing initiatives that we've been talking about for many years. Shawn is based in Ohio and worked for us in Switzerland for 5 years earlier in his career. In terms of myself and what this means for me, let me start by saying that I'm generally enjoying my job and I'm happy to come to work every day. I marvel at what the company has accomplished over many years, but I'm just as excited about the future and what we can all accomplish together. I'm grateful to have such a strong finance team with nearly 50 years of combined experience just between myself, Shawn and Mary. Their competence has allowed me to expand my role and to help Olivier to move the company forward. For you guys, being the investment community, the impact of this organizational change will be limited. Shawn will continue to drive our internal financial processes under my direction; Mary will continue to report to me; and me -- and we, Mary and I, I mean, will continue to be your contacts for Investor Relations purposes. So the bottom line is no big changes from your perspective. Okay that's it for my side and from Olivier's side, and I suggest we now open the lines for questions.

[Operator Instructions] Our first question comes from Ross Muken with ISI.

So, I guess, maybe let's start out with Asia Pac and China. You gave some color on some of the specific end markets on the Industrial side that were weak: metals, mining, materials, et cetera. It seems like there are some real structural issues in those parts. As you look at the rest of the Industrial or applied or environmental complex in Asia Pac and China, specifically, were there any pockets where you saw some better order trend over the course of the quarter? Or where you felt like you're going to get a bit better contribution in '14 based on the trajectory change?

Maybe I'd start with the following: I would say that there's an element, and we've talked about it many times in our business about how comparisons go. And I think, on the order entry side, we started seeing some slowing growth in order entry and eventually declines last year. And now, this year, we were talking about let's just compare apples-to-apples. I think, we had a total of 12% decline, including these exited product lines. And on the same basis, I think, order entry was only about a 3% decline. So I do tend to think that the comparisons will become easier starting in the second quarter of next year. So that's just maybe an overall comment. And you made some specific questions in and around segment areas. I think that if we look at these segments that are close to the consumer spending trends, you'd see a lot about consumer confidence in China, where we see nice numbers coming out of. For example, we were talking today with a Chinese leader of a bottling business and reporting super growth recently. And so we do see that the food segment of the market has one example, particularly, food quality topic is going quite well. As you mentioned, environmental, it has gone well, but not as many of our products go into that segment. And I think that Olivier often talks about the impact of capacity utilization. And from a capacity utilization, I think that there's still excess capacity, overall, from a Chinese point of view. But I think it's good that it's starting to be nothing to a little bit. Recently, their manufacturing GDP numbers and leading indicators too, that haven't been too bad. And so we do expect things to improve overall.

You also, just to sort of stick on the topic, talked about sort of a changing mix, over time. And clearly, Lab, as a percentage of total in some of these applied markets, food, et cetera, will be a bigger part of the exposure. Remind us, where are you now in terms of mix in the region? And then, I guess, the question is how long is it going to take if some of these base markets that have helped you over, I don't know, the last 5 or 10 years, and many other players don't sort of rebound or take some time to rebound, how long will it take for kind of the mix to shift to a favorable-enough level for you to get back to more historical or significant teens or double-digit type growth rates in China and the region?

Maybe the double-digit and mid-teens numbers, I think, we would not expect those for next year. We do expect growth and pretty decent growth in the second half of the year. But probably, our view would be before we see mid-teens again it would be, at a minimum, probably '15.

Okay. And then just lastly, on Europe, can you just sort of dissect there just maybe the pacing of the quarter and then I'll bow out?

Okay. Do you want to...

Yes. Maybe, Ross, just quickly back on China. I want to stress the point the part it will take longer for us to recover is the part where there is significant overcapacity. And consumer confidence will not really help there, that takes typically multiple quarters. However, there are regions in China that are still developing. And there we see, actually, growth. And I was happy to see that the west, for example, for us, in China, had good growth. And so I am actually confident that next year we'll find segments and we will find multiple territories that will yield good growth for us and that it takes just a little bit more time than for the other segments steel, but also chemical and so on, that will take a couple of quarters to rebalance because they have overcapacity. So yes, that's maybe an additional flavor of why we feel comfortable that later next year, China will show better numbers for us.

In terms of how the pacing went in Europe, order entry growth was, I think, one percentage point less than sales growth in the quarter. But it shows it was not just us eating in the backlog, it was a solid number for Europe. And so I think we'll have a decent growth number coming out in Q4. I would not expect it to be 7% again, but I think we'll see a mid-single digit kind of growth number in Q4 as well.

The next question comes from Isaac Ro with Goldman Sachs.

If I could just maybe spend another minute on China, I'd be interested if you could put some color on what you're seeing in terms of market penetration there? And, specifically, I think there's been some controversy, over the last few years, as to the fact that on the one hand, you've done a great job capturing the opportunity, on the other hand, the marginal customers you were working with are typically in tier 2 and 3 cities. And, I think, in the summertime, when there was a little bit of the spike in the cyborg dynamic, there was some concern about their access to credit and so forth. So I was just wondering, this quarter, if you could maybe put an update on how you feel about your market penetration? And if that was up to your expectations, as you put the greater Chinese kind of performance in context?

Okay. I still feel extremely good about our market position. We are certainly the strongest brand. We are perceived as having an excellent quality. We have a very strong team and we have a very good coverage. We are facing a lot of competition there, local competition. As mentioned at previous times, the Chinese market is still very fragmented, in particular, also in Industrial area. But I feel very comfortable that we can maintain this very strong position. I would, however, recognize that the current environment leads to situations where we are walking away because our margins get too low or we are walking away because the payment terms are not attractive to us and these kinds of businesses can go to competition, but that's okay for us. I feel also that our strategy that we are pursuing, of expanding our coverage in China going to second tier, third tier cities, is still a very good one. I have continued evidence that this development will go on and that we can capture additional market share by this strategy. So I really feel the team and the strategy is very solid and we just need now to overcome this economic cycle and these challenges. It doesn't come fully unexpected. We always said that China is offering very good growth prospects, but it's also more volatile than in the western markets. And we enjoyed excellent growth for many, many quarters, and now we are challenged. And nevertheless, we didn't expect that it would last that many quarters. That's certainly also when we talked last time, I would have expected a better number for this quarter and that's certainly one reason why we remain cautious going forward. But the mid- and long-term prospect of China remains very, very good. We see also that, in particular, for the type of equipment that we are selling in China, we are in a favored position. And the drive towards quality is helping us also relative to competition and we are known for the best quality products. And that positions us well versus international competition, but also versus local competition.

One follow-up here on the food retail business. I know it's small and less of a driver for the overall, but it looked like a pretty solid print there on growth this quarter. I'm wondering if there's a onetime event we should keep in mind? Or if there's a dynamic here that could persist through the end of the calendar year?

It's a lumpy business and, often, it can be driven by large projects, in this case, actually it wasn't a particularly large project, the U.S. actually did well on retail and we had also in Europe that did well.

It's was a relatively easier comp. Actually, the comp getting a little bit tougher but, hey, I think our market position in China remains -- or sorry, in retail remains pretty solid.

The next question comes from Daniel Brennan with Morgan Stanley.

Just maybe you could spend just a little more time on the topic right now China, but in terms of the businesses that you added in the quarter, maybe just a little more color about the decision behind that. I know you gave some quantification of the impact on growth. But any comment what those business have been doing for you? And as we look out, is it something that we should expect going forward? If you could be more tactical on any other parts of the portfolio in China?

Hey, Dan, this way of businesses steps, as long as the economy was doing well, were attractive to us. Now when the economy becomes difficult, we certainly face margin pressure there, and then, in particular, the financial terms became difficult, and payment terms that just were not acceptable for us. And that's certainly also driven by the structure, who owns the businesses that is buying the type of equipment, and so we decided to exit it. I would stress the point that this is businesses that we were -- historically, wanted doing it in China, and we don't have that kind of business in U.S. or Europe. And I do not foresee that this becomes, now, a prejudice for more to come. I think that was an exercise that we had to do this summer under this new economic circumstances. And in that sense, I look at it as a onetime effort that we have to do here. But it carries forward into next year.

I would add that, I think, by making that decision to do that, it allowed us to be able to communicate more easily with the Chinese management team about redirecting resources to the better growth opportunities. By making that decision, then, it was easier for us to push for investment in other areas.

And then, in terms of -- as you mention, Olivier, like when you look at some of the signs on China manufacturing, PMI or something in that has been grinding kind of steadily, but slowly, up. But yet, certainly, the difficulty for us to watch from the outside, how your industrial business is doing inside, and how much of the benefit lurks from of the build-out, and now maybe the kind of low utilization despite the manufacturing team are increasing, maybe the question is, how -- the visibility that you have and the cushion maybe you put to the -- may have built in for next year, what do we look for to maybe kind of help us get comfort as we watch some macro indicators over there and for the turnaround in your Industrial Business, I mean, anything you can help us there?

Yes. I would start with the point that the key challenge that we face in many of the industry segments is that the manufacturing GDP growth came down versus expectations. And so many of our customers have overcapacity. And in that sense, even if manufacturing GDP growth recovers, it first needs to recover so much that the overcapacity is reduced or eliminated. And that's why Bill referred before, that we see fewer new plants being built and there is less plant expansions. Predicting exactly this one is difficult, but having consumer confidence coming back is the first step toward seeing -- having our customers again, getting confidence that they will sell more and, therefore, need to have increased capacity. So these very early trends are going in the right direction. And we are just facing a delay until we are going to see it in our numbers. Of course, it varies also by product lines as well as business segments. For example, for the food industry, I would expect that to see it much faster than, for example, in the chemical industry.

Maybe I sneak one more in. Can you let us know, what's kind of implicit in your guidance next year, Olivier? Like for China, as you look at '13, what's implicit and kind of -- whatever kind of improvement or more gradual decline as kind of built-in your guidance for '14?

We'll have -- we expect kind of mid single-digit growth coming out of Asia and then, China might be a little bit less than that because of the impact of these exited product lines. And then, we would assume that Lab does better than Industrial within that mix. So yes, you probably -- you'll see, even some minus maybe, in Industrial at the early part of the year, but the overall picture would be something like how I described.

And within Industrial we would expect product inspection doing better than core industrial..

Product Inspection will do very well, but percentage-wise, it's not that big of a number yet. Not the same ratio as we have in the west.

The next question comes from John Groberg with Macquarie.

Last quarter, Olivier, you spent much time talking about service revenues. Can you maybe give us an update on what those did in the quarter and maybe geographically?

Yes. So service was in the quarter -- Mary is just helping us.

3.5%.

3.5% growth. And actually, we did pretty well across the globe. Americas maybe a little bit less. Bill mentioned on the call that we went live with Blue Ocean in U.S. and you can imagine a go-live for Blue Ocean impacts definitely also the service organization. And in that sense, we were a little bit lower there. But overall, Europe and, actually, Asia, including also China, was reasonably well on service.

Okay. And then, Olivier, I know you mentioned that most of your free cash flows you mean to pile back in the buybacks, as you have historically have done. It's about 3.5% -- for 3%, 3.5% free cash flow yield right now, in terms of where the stock is. I'm just curious, as you think about maybe in China and wanting to diversify a little bit away into outside of the core industrial and to some of the markets are growing faster, and you look at some of the other analytical tools and technologies that are out there that are continuing to grow fairly fast in China, do you think about maybe looking at -- you've done deals in the past, like smaller adjacencies that can give you access to new technologies that might help you to improve that mix of your business in a geography like China more quickly?

The main strategy remains really the same. We, as you mentioned, we are interested in adjacent technologies. We are interested in consolidating the markets, but I would not give particular focus on China. And there are not that many opportunities. And to be honest, acquisitions in China are not that easy, there always are complications with would to pick[ph] at this stage, I have also to say, I prefer that our team is focused on the organic opportunities. I really think that with our portfolio, we have many opportunities and we don't need to do acquisitions to regain here a good growth out of China. So it's not a particular focus.

I might add that maybe the start of your question, Jon, might have implied M&A versus share repurchase, and I think we both feel that, to the extent, we identify opportunities that makes sense, there's plenty of room in the balance sheet to absorb acquisitions and that wouldn't hinder our share repurchase plans.

Right. And I was saying so much for trying but I was thinking, you say, for example, your product inspection or food testing, or some of these areas that are less represented in China, maybe as a firm overall, there could be, if you want to move away from having as much exposure in pure industrial, maybe you look at -- there are some pretty clear adjacent technologies that analytical tools that people use in areas like food safety testing and other areas. So that's more what I meant in terms of entry point. Bill, not that you'd have to do one or the other, but I didn't know if that at all more of a focus in terms of looking some at adjacencies that you might get into?

We remain very interested in these and you have seen us, for example, by acquiring 2 vision inspection companies in the last 2 years. So these kind of adjacencies, remain of high interest to us. Vision inspection is a technology that has accelerated growth, is very complimentary to the PI portfolio and would definitely also -- or will have a good impact on emerging markets and so on. We are interested and we pursue these acquisition opportunities, but there is nothing that I see here materialize in the coming weeks or that I would have something to announce here.

The next question comes from Tycho Peterson with JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: I won't ask you on China here. But just I'm thinking about some of the comments for '14. Can you talk a little bit about pricing, what's baked in the guidance for pricing?

Hey, I think we're going to be able to do a number in the 150-basis-point range. That's a little less than we have this year. As a reminder, we did a mid-year price increase in 2012, which benefited us this year. But the way we see the market, at that point in time, we're able to push through a midyear price increase, in part, because of a lot of sense of inflation coming in. We don't see that opportunity now, but a number in 150 basis points, we think is realistic for next year. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then, can you kind of help breakout for this quarter, these margin benefits, that you saw from price material cost and mix?

So in the quarter, price increases were up about 240 bps. And just as a reminder, that had about 120 bps impact on the gross profit margin, just the way the math works. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then, Olivier, you commented on selective reinvestment. You gave us a sense of some of the new products a little bit. Are you able to kind of quantify the extent to which you're stepping up some of the investments for next year?

The way we should look at it, we always launch many products every year. And in that sense, I would first say an individual product doesn't make a huge difference to the top line. And the same without however else to say, to the R&D budget. Our R&D budget are relatively stable and I would also expect when make sure that the R&D budget remains about the same what we have had in recent years. I do expect that our productivity continues to increase our R&D, because we are also leveraging low-cost countries in R&D activities. On the investments that I was referring in the prepared remarks, was more towards field resources. The example that I gave on the call was, for example, Indonesia, Vietnam, Philippines, Turkey, Brazil, but many other markets. This is, in essence, less related to product innovation, but making sure that we have really a good coverage in the different markets, in different territories, investing in application specialists. But sometimes, it can be also the expansion of our telesales team or other marketing activities. So again, investment more towards growth, to field activity and field presence. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then, a last one on -- sticking with the cost theme, when things slowed a year ago, you took out incremental costs. How do you think about things in the current environment, given the present set of challenges, in particular, with China that you kind of talk about here?

So for China, we are taking measures. We started actually already early in the year. And we saw still underway, we have selective headcount reductions and we are certainly also doing resource shift, Bill referred before, to the business exits that we have that allow us to redirect the attention of the team to more attractive segments and this is associated also with resource shift. Besides that, in the September time frame, Bill or myself were on the global tour to do the budget, reviews with all our operating units. With these operating units, we are assuming a modest improvement of the economic environment and this is reflected in the operational plans. Should the economic environment change for the worse, of course, we would have to go back and rethink some of the assumptions and the related cost base. But it's not that we feel that we already need to initiate here another cost program.

The next question comes from Dan Arias with UBS.

Unfortunately, I'm going to ask about China, but I only have one question. So with Bill or Olivier, I guess, are you seeing any exits from the markets in China, aside from your own? I think, over the summer, you had talked about may be ending up in a better position, once the smoke had cleared on the cycle we're in, just from some small players deciding not to stick it out, could that still be the case?

Yes. We'd still see that. It's a -- hey, I have hard time to give you concrete examples and -- but the fact is, we, in China, the big-named industrial weighing world, we are talking about hundreds of local competitors many of them are family-owned and small regional players. I definitely would observe that they are faced with even more difficulties, and the financial situation makes it also very difficult for them. So yes, I do expect that we will continue to emerge stronger out of that situation. But it's very difficult to quantify what this really means.

The next question comes from Paul Knight with Janney Securities.

As we've seen this recovery in the economic indicators like PMI, it seems like the recovery has been slow, globally. Why do you think that is? And obviously, you had lower end organic growth, what do you see happening in, I guess, customers’ attitudes creating this kind of slow, shallow recovery?

You're probably wording the question in a way that's a little different than how we think, so it's hesitating a little bit. I think, first of all, I think, we've always been a little bit late cycle would be kind of one comment when it comes to economic recovery. And then the second thing is, if you think about our Western businesses, our Western businesses always have -- are largely replacement in nature, either the replacement of our own products or the replacement of competitor products. And so replacement cycles rely, to a certain extent, on economic stability. I think, right now, we're definitely benefiting in Europe from both of those. I think, for the first time in a while, now, in 2013, Europe is not having a lot of noise, and we see, now, a return to good growth in Europe, as a result of that, combined with easier comparisons because of it. In the Americas, I think we very much see the same. I think our Americas numbers were solid in a quarter with 5% growth. And I think we'll put up something similar in the fourth quarter. I think in terms of what we see in China, it's a combination of things. It's the growth, we're a little bit later cycle of its impact of capacity utilization in the investment in new plants and plant expansions that Olivier talked about, and then, the fact that our business is going through a little bit this transition from some of the older infrastructure-related segments to some of the newer segments and how that evolves over time. So I -- our view is we're going to start to see some modest improvements next year. Certainly, we'll grow more in '14 than we did in '13 on the top line. And China's a little bit the variable. If China goes better, faster, than we think, that could be an upside. But as well, we need to see if there's another, if there could be another bump in the road there or somewhere else as well.

And then, the last question would be labor cost in emerging markets, is that an issue? Is it more difficult, less difficult, tone there? And that's the second question.

Yes, I think we have similar type of inflationary pressures on labor and other factors in emerging markets, particularly in China. But a very much in line with what we've had in recent years. I would say that our teams there have always done a good job of productivity gains. We focus on that a lot in China, make investments, whether that be in automation, in Lean processes or whatever, and we expect that to continue. The one thing I might add to it is that vis-à-vis our pricing initiatives, our emerging market countries are getting better at realizing prices than in the past. And I think that's one additional lever that we have now, going forward, to help us overcome some of this inflation that you talked about.

And then last, Olivier, you talked about South Asia. And do you think South Asia has the same opportunity that you saw in China 10 years ago?

Yes, I wouldn't too much correlate's it with China, I would say, in general, emerging markets are, actually in China, we have a particular situation because we started extremely early, we were -- we're one of the very first fine companies there. And we, very early on, build up production plants, have local engineering and it's certainly also one of the reasons why we are more skewed with the Industrial business mix. But the order -- emerging markets, don't have the same business mix. And typically, actually, we would even first enter our market through Lab and Product Inspection and then the Industrial would follow. And that's partially now also the case with this new Southeast Asia market. And yes, I have big hopes. We have an excellent team. We have been -- we have a very strong base today already in Singapore, Malaysia and Thailand, and that strong team is a bridgehead to go into Vietnam, Indonesia and Philippines. And in that sense I would rather see scaling up that presence to these new markets rather than saying it’s out of China or has a connection with China.

The next question comes from Sung Ji Nam with Cantor. Sung Ji Nam - Cantor Fitzgerald & Co., Research Division: Maybe just another question on emerging markets. If you could talk about some of the -- like India, Brazil and Russia, which I think, in aggregate, are pretty sizable business for you guys and how they performed in the quarter, and what the outlook might be in those areas?

Okay. Let me start maybe by saying, while emerging markets, in total, is about 36%, 11% more than half, or about half, is coming from China. And then the remaining countries, all are much smaller. None of the other countries would actually be more than 3%. So it's -- we have important markets like India. We have Brazil. We have Russia. I mentioned Southeast Asia, but also countries like Korea and so on, In general, I have to say, I'm pleased at how they are performing. I would, first, also say, we have very strong teams in all these countries. And we have a very strong market presence. In India, you have heard me talking in the past, we still have some development to do. We, for a couple of years, didn't grow as we wanted. And then we had the leadership change and made some other changes 2 years ago. I feel that the team has actually emerged very strong out of these changes. But I would also recognize that the Indian market, the Indian economy, is a challenging environment right now. But how we do, relative to competition and peers, I'm very pleased by that. So that's -- maybe as a context, I would recognize that several emerging markets are impacted by the Chinese slowdown. We would see that even in Brazil, because Brazil would also export a lot of things to China, and so there are side effects, all we have the neighbor countries of China, of course, that are also impacted.

The next question comes from Derik De Bruin with Bank of America.

So Bill, can we talk a little bit about just sort of expectations for margins in 2014? Just sort of running through my model and assume that you guys do the same general share buyback, it looks like, generally flattish operating margin forecast for next year, is that sort of where you're booking?

No. We're going to do, I think, a little bit better that, I think we'll have 50 basis points.

Okay. And in just historically, in Q4, we always have...

Yes. Just to be clear, I was talking about the number. We always talk about that number before amortization, and then you'll have amortization increase, I think, by $4 million or something.

Got it. And for Q4, typically you have between Q3 and Q4's in terms of the gross margin number, same trend this year?

Yes. Yes, let's call it, 50 bps versus Q3 and, I think, could be a couple points more than that.

Great. And finally, for interest expense guidance for 2014?

So interest expense will be a modest increase, let's call it something like $1.5 million or something.

[Operator Instructions] The next question comes from Brandon Couillard with Jefferies.

Bill, looking back over many, many years, I can't recall you ever guiding such a narrow range for local currency growth for your initial cut. It feels like a lot can happen between now and a year from now. Anything particular message hidden in this dynamic?

No, not really. A, probably because the midpoint that we felt was the most likely number required that we have a narrow range. And I know that sounds kind of funny, but it would've been funny to give guidance of 2.5 to 4.5, so we gave guidance of 3 to 4. I wish I had a more scientific way to give it to you, Brandon.

Fair enough. And then could you give us a sense of what you're anticipating for local currency growth, by geography, and perhaps, by segment? That'd be helpful.

Sure. I think that we're going to have, in '14, we'll have low- to mid-single-digit growth in Europe and the Americas, with the Americas being a little bit better, Europe a little bit worse. And then, the Asia/Rest of World number, should be in the mid-single-digit range, with China being a little less, largely just because of these product line exits we described and the impact that they'll have for the, let's call it, the first 3 quarters, 2 quarters of next year. Yes, hey, that gives you a feeling, geographically. In terms of the divisional view or product category view, we should get mid-single digits coming out of our Lab business. I think because of the big China mix, our Industrial business, our core industrial business will be flat, but we'll have high single-digit growth in the Product Inspection area, and, hey, let's assume that, that ends up being a low to mid-single-digit kind of growth rate combined. And then, hey retail will be flattish.

There are no additional questions at this time. I turn the call back to our presenters.

Thanks, Jay. And thanks, everyone, for joining us tonight. Of course, if you have any questions or follow-up, don't hesitate to give us a call. Take care.

This concludes today's conference call. You may now disconnect.